January 2014

January 23, 2014

What do a German Razor Factory, an American Thermostat Firm and a Drones business led by a Greek entrepreneur have in common? They are all vertically integrated plays.

Backed by Tiger Global, Harry’s, an Internet razor factory, not even a year old acquired a factory near Nurembourg which makes razors which was 93 years old. They have done this in order to control the entire customer experience, while allowing the company to change its products quickly. There are hints of Zara in their approach.

But also of Nest, the so-called thermostat company, which set out to turn unloved items in your home into objects of desire; it was recently acquired by Google for >$3 billion. If you unpack what the Nest team had to understand to do what they did, they had to dealt with the guts of houses and their pipes as well as customer design issues and user behaviour.

What a change! Time was where horizontal (not vertical) tech start-ups were the darling of the Valley Venture Capitalists. Once upon a time the world was PC-centric, and Wintel, the Windows-Intel alliance, ruled the PC Platform. Software was the greatest invention to make people wealthy as the margins were massive once you sold the stuff. Niches had to be found amongst the horizontal layers above the operating systems. Nobody dethroned Microsoft until the world started to move beyond the PC.

Fast forward to the Consumer Electronics Show in Vegas January 2014, and I saw platforms everywhere – the car, the home, the person. Elsewhere we know that the ship, the space rocket ship, the airplane, the train are all becoming platforms as well. How are each of these industries catching up? They are looking for entrepreneurs who are taking a system-level approach to the total customer experience in these new ecosystems around the new platforms.

What defines an ecosystem or a platform I hear you ask? Well, in a multi-stakeholder world, an industry is an ecosystem. It’s a system with a sense of order, natural allies or camps, but not an inherent hierarchy. Those who organise the economics for those ecosystems are the winners. I call those companies platforms.

It’s a good place to be.

Those who touch ground – whether telcos, hospitals, schools, airlines – get regulated, must build infrastructure, pay tax. Infrastructure is a tough place to be. That’s why the technology platform companies are winning – iphone & ios are in the ascendancy, not Vodafone or Telefonica. They leverage the investment that other people are making, and organise the economics for the ecosystem. Upside without the pain.

The challenge for the CEO of a traditional larger enterprise whatever sector is to reimagine their industry as an ecosystem, identify their natural allies, ask what they can do to make in their interests to work collaboratively, and to open themselves up to consumer-orientated applications to run over them. British Gas could have created Nest. British Telecom could have created Skype. Volkswagen or General Motors could have created Tesla.

But they didn’t. They didn’t reimagine their industries as ecosystems, so an entrepreneur did.

The transportation sector is no different. Amazon’s announcement that they were testing drone delivery forced the CFO of every DHL, Fedex, UPS and TNT to do two things before Christmas:

reforecast their revenue downwards from Amazon

look for a dance partner in the UAV space.

That’s the thing – again and again – Goliath doesn’t have the clockspeed, rests on his laurels, doesn’t anticipate change much less embrace change, and that gives the David the opportunity. I saw that in 2003 when I had just started advising Skype, and the CEO of a major incumbent telco told me I would lose my shirt with Skype and they would go bust. I responded, ‘how fascinating: you’ve decided to underestimate the entrepreneur who disrupted the entire music industry with Kazaa. Let me tell you – he is so glad you are underestimating him right now. You are buying him time. To change the world.’

Andreas Raptopoulous, Founder of Matternet, is creating a vertically integrated drones company. It is the most loved and inspiring UAV business in an industry which is feared. He aims to create a wonderful total customer experience with drones, re-imaging the way that delivery of necessary goods come to people and their interaction with them. He has to be an expert in robotics as well as customer design. This system-level approach combining hardware and software is making the company one with huge momentum.

So if you want to build a billion dollar company, it’s a hardware & software combination today. The Harry’s, Tesla’s, Nest’s, and Matternet’s show the way.